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HSBC - Investments in growth dent profits

Nicholas Hyett | 6 August 2018 | A A A
HSBC - Investments in growth dent profits

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HSBC Holdings plc Ordinary USD0.50

Sell: 435.85 | Buy: 436.00 | Change 6.15 (1.43%)
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First half underlying profits before tax of $12.1bn were 2% lower than a year ago, as higher operating expenses offset revenue growth and a decline in expected losses from bad loans.

The board announced a second interim dividend of $0.10.

The shares were broadly unmoved in early trading.

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Our view

HSBC's always had an Asian flavour, it's named after two Chinese mega cities after all. But after years retreating from smaller international operations, the bank is now betting big on the high-growth emerging economies of the Far East.

Capturing that growth isn't cheap, and the cost of expansion is coming in slightly higher than had been expected.

The bank is spending heavily on its Chinese investment banking business and expanding its retail banking footprint in the UK and China. Increased investment in digital capabilities is also demanding significant quantities of cash, although should bring long term cost savings.

Fortunately, HSBC is delivering income growth as well.

Both total loans and interest margins have improved, and this sort of income should prove sustainable in the long term. Low levels of loan impairment bodes well for the quality of the new loans being made. The bank's trading and investment banking divisions are also delivering positive performances, albeit more modest.

The bank issued 221,000 credit cards in China in the last half and has successfully launched HSBC Qianhai Securities, the first foreign owned business of its kind in mainland China. Management are also looking to capitalise on the flagship 'Belt and Road' initiative as China looks to improve its access to global markets.

However, emerging economies are volatile, and if China sneezes, HSBC will come down with a bad case of the flu.

Our other concern is that HSBC's sheer size and complexity makes it difficult for management and investors to really grip what's going on across the business. 229,000 employees creates lots of opportunities for small parts of the business to operate in ways that damage the wider group.

Nonetheless, we think the bank's long term outlook is positive. As rapidly developing economies with growing populations, there are fundamental attractions to Asian markets, and while investment may hold back profitability in the short term, it's necessary to support growth.

With new CEO John Flint in place, 2018 could be the year HSBC proves its move East can really pay dividends.

The shares currently offer a prospective yield of 5.6%.

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Half Year Results

Net operating income rose 3.1% year-on-year to $27.1bn.

Within that, net interest income rose 9.6%, as HSBC reported 5% growth in net loans to customers during the half and a slightly improved net interest margin (the difference between what the bank pays to borrow and charges on loans) of 1.66% . The bank also benefitted from a 38.6% decline in bad loans, now at $407m.

Underlying operating expenses were 7% ahead of this time last year at $17.5bn. That reflects increased investment in the retail and investment banking divisions, specifically on increased staffing and digital initiatives.

All the bank's operating divisions delivered positive income growth, with Commercial and Retail banking up 8% and 12% respectively. Asia now accounts for 49% of total revenue, with income growth of 13% during the half.

The bank reported a CET1 ratio of 14.2% at the end of the half, down from 14.5% at the full year stage, following the start of a $2bn share buyback.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.